The Bank of Israel yesterday cut the interest rate for the third consecutive time to 3.25%, surprising the market which had priced in a 40% likelihood of a cut. All this at a time when rates are being hiked in the US and Europe. In an interview with "Globes," Bank of Israel Governor Amir Yaron explains what motivated the Monetary Committee to make the decision, whether he is concerned about the state of Israel’s tech and exports due to the strength of the shekel.
In July, the Bank of Israel published its latest forecast, in which it estimated that by July 2027, the interest rate would be 3%, so the decision brings it closer to this target. "We are acting on the data and examining what is right for the Israeli economy. It is true that we specified an estimate of 3% in the last forecast and will come up with a new forecast in the next interest rate decision. There is currently no update on the subject. We are acting on developments and it is certainly possible that we will get there, but it all depends on data," Prof. Amir Yaron told Globes.
He was also asked about the publication of the Central Bureau of Statistics' GDP estimates, in which in the second quarter of this year, the economy grew by 15.4% in annual terms compared with the previous quarter, in which the war with Iran took place - a growth rate of 6.2% higher than the last quarter of 2025 However, the Monetary Committee noted, "Excluding the activity of Israeli companies abroad, growth in the first half of the year was more moderate - GDP in the second quarter of 2026 was 3.8% higher than the last quarter of 2025 (in annual terms)." In doing so, the Committee referred to the "Nvidia effect," in which giant companies are registered in Israel, but produce and sell outside the country in a way that does not reflect the real economy.
Yaron said, "The decision made today reflects risk management. On the one hand, there is inflation and activity, and on the other hand, there is high uncertainty. Inflation is below the center of the target (2%) and is now 1.5%, and although it is expected to rise in the coming months, we include this, with fuel prices and so on, and it should stay around the center of the target. A second element concerns economic activity, and it was strong in the second quarter of the year, but without production abroad, it is more moderate and the indicators show a moderation in demand and supply constraints. The shekel is also strong and it is still not clear whether its full effect on inflation is being expressed. When we take these together, they support a reduction."
We see a decline in tech fundraising and exports. We also see in the financial reports of companies on the stock exchange high hedging costs, write-offs of profits and the transfer of activity abroad. Is this interest rate cut, the third in a row, intended to help with the exchange rate?
"First and foremost, we look at inflation. If you look at the Bank of Israel Law, it ranks various considerations and first of all inflation, and there is also a section that talks about financial stability. We see inflation below the center of the target and we are aware that in the coming months it will rise, but we look at a slightly longer perspective of six months to a year and there it is expected to stay around the target range center. There can of course be upheavals, but these are our estimates. Beyond that, we see that despite impressive growth figures in the second quarter, activity without production abroad is more than moderate. The data from the Central Bureau of Statistics, which retroactively updated GDP from the beginning of 2023, indicates an annual rate of 1.8% in growth without production abroad, and we also see moderate data in the export sector. Therefore, given all these things, we decided to cut the interest rate."
The governor also referred to the "Globes" revelation that Prime Minister Benjamin Netanyahu wants to opening the state budget to add billions to the defense budget, as well as to anchor the military procurement plan totaling NIS 400 billion for the years ahead, despite the fact that these are months before elections and the formation of a new government.
"We are in a fiscal trilemma," says the governor. "Any government that is formed must implement a balanced budget policy: returning the debt-to-GDP ratio to a downward path, and we need to create fiscal safety cushions. Financing defense needs without pushing aside essential civilian spending. Even if the defense budget increases, there is no such thing as a budget limit, and there are no free lunches. This will be reflected later in taxation or in reducing other civilian spending or in future taxation, interest rates and inflation."
Therefore, the governor explains, "Within the defense budget with such increases and such a potential impact, we must try to be as efficient as possible. The third pillar is super important for Israel and is investment in major growth engines in education, transport infrastructure, and housing. This is the challenge for every government that comes into office, and therefore, even now, we must try to be as modest as possible and do only what is necessary in the area of investments in defense - so that degrees of freedom remain for every government that comes into office in the future."
Published by Globes, Israel business news - en.globes.co.il - on September 2, 2026.
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